NO, I don’t want a rental property thank you.
Sep 29, 2019
Have you noticed that I never really talk much about real estate? Except to say that I own the house I live in and I have never really gone too far down the path of writing about property as an investment.
With the equity that we have in our house, the ‘obvious’ thing to many Kiwis would be to borrow against it and buy more property that I then rent out to other people.
For many this has been a way to successfully grow their wealth. To many, it has not.
I had a good landlord once…
When we were living in Wellington in the early 2000’s we had a good landlord who owned many properties, probably about a dozen at the time. The one we lived in looked good, but was actually a bit s**t. It was hard to decide which was worse:
The three women who lived in the flat upstairs which happened to have nice polished wooden floors. They all got up very early, tottered around in their high heels, went off to work and then came home late, still in their high heels...
Or the dampness of the place which permeated everything I owned.
When this landlord bought a brand new two-bed unit, he offered it to Jonny and I. We moved in at double the rent, but it was a great wee spot, a fantastic house and absolutely perfect for us as we were both working full time with good careers in Wellington.
Buy property, it’s never going to be this cheap again!
It was this guy who said to us “buy property, it is never going to be this cheap again”. Handily for him, his wife was a real estate agent and I suspect he had his banker on speed dial and he was going for it, buying up large all over Wellington. He was one of those “always around landlords”, he would just stop in unannounced which didn’t really bother us at the time, and each time I saw him he would tell me that he was busy acquiring more property.
So, did we take his advice and start to purchase real estate I hear you ask? No.
I was allergic to debt then as I am right now, we didn’t know if we were staying in Wellington or moving on to somewhere new, plus I had spent so many years living in Dunedin rental properties that apart from that final house we rented in Wellington, my perception of the rental market was a bit skewed.
I don’t think I ever felt that I was throwing my money away by paying rent, instead I probably often thought, “man this house sucks, thank goodness I can leave at any time and it’s not my problem”.
The worst rental of all…
I think the worst house of all was the one that three of us sublet off a friend during one Dunedin summer for cheap rent ($16 each!!!!). The place, which was in a block of four, was an almighty dump. Cold and old, the plaster ceiling collapsed on my flatmate while she was asleep one night, narrowly missing her head. It had one powerpoint in the tiny kitchen so we instead cooked our two-minute noodles on a one-ring burner in the tiny living room, via an extension cord through a hole in the wall from the tiny kitchen... The fire escape was a set of rickety stairs off the back of the house, which if the fire didn’t kill you, they surely would. We were awful neighbours to live below because we had a huge stereo (so the Wellington flat experience was karma in a way). And the final delight was when someone actually DID set our house on fire when we were all upstairs asleep (all the junk mail piled up at the front door that we never thought to dispose of was just too big a drawcard to a passing arsonist). When the fire brigade put the fire out I remember one fatherly looking firefighter looking at we three young women and saying “this place is an absolute death trap, you should leave”. Which we did - at the end of the summer - and our friend who we sublet off moved right back in for the academic year!
It was cheap rent after all (I still can’t believe just how cheap it was) and we needed it while we worked the summer to help pay for uni.
I had one landlady who was definitely insane (no doubt about it), many whom I never knew or saw, they were just the name on a document. Even once the house was set on fire, we still never saw that particular landlord. I have had more flatmates than I can count, many are still friends to this day, some whose names I can’t even recall. When you are young and are renting, you can’t imagine it being any other way and in hindsight, my friends and I were sometimes not good tenants. It simply never occurred to us to tend a garden or clean the windows, but we always paid rent on time and there was always a huge cleanup at year end because we wanted our precious bond back.
In most, if not all of the places I rented we never asked for much in return for the rent we paid. A key to the front door and to be left alone were about it really and a lot of times, especially in Dunedin, we just accepted our substandard living conditions as being the norm. And as I got older I did thankfully become more house proud and realised that it was actually part of the agreement that we look after the place a bit...
My last go at renting was about six years ago when we moved to Central Otago from Christchurch. The first place we rented went on the market soon after we moved in, so we had to pay rent AND keep the place looking like a showhome. It did sell so we had to move and the same situation applied to the next property as well. We put up with annoying and pushy real estate agents wanting to show people (who were never going to buy the place) through at a moments notice - even if we were about to serve up our dinner. I didn’t enjoy the experience at all, they wanted maximum rent and maximum access.
Nope, it is safe to say that for me renting holds no allure because apart from two notable exceptions the landlords who wanted to provide a warm and comfortable long term home were the exception to the rule in my experience. I seemed to come across those who were looking to pocket the rent and watch their capital gains grow and they do tend to give everyone else a bad name and their stories hit the media the most.
My math of buying a rental property just didn’t stack up.
When my Wellington landlord suggested buying up houses and renting them out I thought about the math:
Find a house to buy
Get a mortgage
Pay mortgage interest
Pay rates
Pay insurance
Pay tax
Pay an accountant and have a lawyer on standby
Pay a property manager
Pay to fix lots of stuff
Plus, in today’s context, if you sell within five years of buying, the ‘bright line’ test means you pay income tax on your capital gains and you also need a bigger deposit to buy a rental property than you do your own home and you can’t raid your KiwiSaver to do it. But you have probably already been encouraged to raid it to buy your first house anyways... New rules mean that property investors are being made to provide warmer and drier homes for tenants and they need to make sure there are such things installed as insulation, ventilation and heating. i.e. provide a half-pie decent house. And now losses on a rental property can’t be used to offset other income either.
All for a rental yield of 3-5% gross. GROSS.
Really, all that work and hassle for that?
Having worked in new house builds and having now owned two houses I’m more aware than ever that things age, break, wear out and need repair or replacement and every time a rental property tenant calls the landlord out to fix something, well there goes that weeks rent, and possibly that months rent. Sometimes even that entire years rent for major repairs. If you don’t own the property freehold then for me it’s just not worth it purely from a rental income perspective.
Rent vs Capital Gains
You either have a rental property to make money from the rent paid by tenants or by waiting for the property to increase in value so you can borrow against it or sell it to release the equity.
For many people climbing into rental property with one or two houses that they have borrowed against their own house to purchase, they think that they are doing an OK thing because one day it’s going to provide them with an income. In the intervening 25 years of servicing a mortgage, however, it will provide the bank with an income and by the time it’s owned outright it’s an old house that needs work anyway, or as you’ve gone along you have reinvested that rental income into fixing the joint up. Or even better, from a banks perspective, borrowed MORE money to maintain their asset. It’s just not an investment that I want to be a part of because it just feels like a massive drain on money from the get-go.
If I was to have only one property that I borrowed money to buy, maybe I pay the mortgage off after 15 - 25 years and then finally this $650,000 lump of bricks provides me with a $450 a week rental return. No thanks. I seem to be hearing from more and more people over the last couple of months who have employed this get rich slowly strategy but have reached the point where they simply can’t be bothered anymore. Owning property, which was once this exciting adventure where they borrowed off the bank against their own property, bought a do-up, got stuck in and did it up, carefully selected tenants and thought they could sit back and watch their equity grow - well over time it turns into a bit of a drag and they began to dread receiving phone calls and text messages from their tenants regarding the property.
Those first lovely tenants have since moved on...
To save the hassle a property manager has taken over, whom you now give 8% of the rent to and they have replaced your original tenants 10 times over by now with other people who really don’t look after the place “how I would look after my own home” and then to top it off, the kitchen needs replaced at $10K, the garden looks like a jungle, no one mentioned the water leak that has now rotted out the floor in the bathroom…
The gloss just wears off and it turns out there are a LOT of moving parts to achieve this $450 a week rent from your $650,000 investment.
In this high housing market, with low-interest rates, I can see the allure, but I also see the strings attached. What does Warren Buffet say “when the tide goes out you will see who is swimming naked” and I can’t help but feel that will be all the novice rental investors one day who are carrying too much debt on their properties. Those who believe that because they have managed to get one house, they really should get two and become a ‘property investor’.
I have spoken with countless unsatisfied ‘property investors’ who took on huge debt and huge risk to create their retirement nest egg, only to have it all go pear-shaped and once they do the math, they actually sell out at a loss.
I just think we have been sold a dud idea is all.
Yes, without a doubt there will be some fantastic property owners out there (and I’ve met a number of them) who want to provide a long term home to their tenants and there is a respectful relationship between a property owner and property occupier, but the market is also full of cowboys. I just can’t help but think if we all backed off trying to make money out of each other by jacking up rents at every available opportunity and selling a property out from under the tenants at a whim and instead found some other way to grow a nest egg, then there would be enough houses to go around, for those who want to own one, at a fair and reasonable price. Thinking back to when I was a kid, most people owned the house they lived in and that was it. We were not all competing with first home buyers at an auction so that we could then turn around and rent that house to the first home buyer who couldn’t afford to buy a house at the auction!
The system seems a bit broken to me.
Now when I speak with people who have rental property they say that the rental yield is just simply not worth it, it might look good as a percentage on paper, but once you factor in mortgage interest, rates, insurance, the property managers fee, tax, accountant and the endless stream of fixing stuff up and other outgoings, it’s just not worth it.
The landlord that I respect seems to have properties that they actively manage themselves and they actually feel like they are providing a nice home for someone. These are the owners who are likely to be mowing lawns for the tenant on the weekend. They own the home outright, with no lending, meaning that they pay for repairs with cash flow and after-tax, insurance, rates, maintenance etc they do get to receive a weekly pay cheque themselves to supplement what income they have coming in. Note the word “supplement”, not “replace”.
I am certainly hearing from people who may have reached that holy grail of owning their property in full and it’s spitting out $450 gross in rent a week, which added to their pension, is still not enough to live on. Why? Because the rental return is drip-fed to you week by week. If you have retired and want to travel, you need $20,000 NOW to book the hotels and flights, not $450 gross a week. You have money coming to you, but it’s in all the wrong places, you may have a property worth say $500,000 but you can’t use any of that net worth, instead, you have to wait for your $450 per week that it generates for you.
And a further thought on property, it’s such a ridiculously illiquid asset.
If you want to cash out, brace yourself for many months of preparation for sale, reduced rent if you are kind enough to offer that to your tenants, the sale process itself, sale and closure costs, paying the real estate agent, lawyers fees etc. It will take months to get your money out and you may not get the price you want or need.
I found out the hard way what the word “illiquid” means in reality. We owned our house in Christchurch in full, but we could not get a penny out of it for years once the earthquakes started.
Take it from me, you never feel like all your money is tied up in a single property more so than when your land gets compulsorily acquired by the government after the earthquakes and insurance and bureaucracy fought with each other about who would pay for what. It was our house, which we owned in full, but nope, can’t get a penny out of it for years. At the time of the earthquakes, I recall a neighbour with four rental properties and the massive issues she had because the houses were broken and the tenants were screaming out for help - or they just left - and she was still having to cover the mortgage. Of course, the tables turned a few years later when landlords in Christchurch really worked out what “supply and demand meant” when they aggressively jacked-up rents. Yep, the system sure is a bit broken.
What’s the answer?
If you love owning property, then I wish you all the very best and well done for reading this far. Chances are that you disagree with most of my comments, that’s fine.
However, if you don’t love the thought of owning a rental property, but feel you should buy one or more because you have been lead to believe that’s the next step to creating wealth, then maybe this blog post might resonate with you and offer you an alternative point of view?
So many people fall into property because they feel that after getting their foot on the property ladder with their own home, then being told it’s worth more fives years later, that its the only way to go about things, that buying MORE property is the only logical way to get ahead. If you ask your bank for financial advice they will be the first to offer this to you as an option.
So, what did I do once I decided that I only ever wanted to own one house at a time?
I love owning property, but just the one thanks. I can stay here as long as I like, no one (except mother nature and the government) can force me out, it’s mine until I choose to move on. If the decor dates, I can change it, if I want to plant even more garden, I can do that too, if I want to let it turn into a jungle, well that’s my prerogative. I get to be a part of my community for a long time and I can enjoy having my pets without being concerned that they might cause damage (which they never have by the way).
So, instead of buying a second property (once we had paid for the one we were in) and having resisted the pressure from our bank who were VERY much suggesting we take out another mortgage, we just started letting our bank balance grow while we figured out what to do next.
That’s what led me to start researching about investing. We felt rich for a while, imagine having all of your pay come into your bank AND ACTUALLY STAY THERE, so we:
Paid cash for travel
We foolishly bought new cars
Then we had a child (one of our better ideas), so I stopped working so I could be a Mum
Then the earthquakes happened
Then the stress got too much, so Jonny quit work too
Then we moved towns
Life just continued to happen once we owned our one and only home and we had plenty of cash flow to save some and spend some.
The value of our home has increased, but...
The value of our home today has gone up since our very first investment in housing back in mid-2002 when we paid $146,000 (with a mortgage of $120,000), and we now have a house apparently worth about $685,000. Let’s just also point out that we spent a small fortune on our first house in Christchurch, completely remodelling it - new kitchen, new bathroom, layout change, new window joinery, landscaping... I never kept records but we spent A LOT of money on that house, all of it paid for with cash. And we won’t even try to put a figure on the cost of our labour or the friends and tradespeople who helped out! This current house of ours cost $435,000 in 2013 (for the house and the land) and then countless dollars and hours spent landscaping and fencing etc. So, don’t for a minute think that the difference between 2002 and 2019 is capital gains of $539,000 because you would be dead wrong.
Even though after paying off our house in 2007 we have spent a lot of money on lifestyle things (if only I had known then what I know now!), we also started investing at that time, tentatively starting with Bonus Bonds and Term Deposits and also KiwiSaver which was brand new in 2007. Today as I’ve mentioned many times before, our investment strategy is very simple; we invest regularly and without fail into our KiwiSavers (Simplicity Growth) and also into two main Index Funds (SmartShares FNZ and USF), plus a few other bits and bobs that we are invested in. So in the last 12 years, with the last EIGHT of those seeing both of us in part-time work (for reference our total after-tax income last year was $55,000 or just $1065 a week) we now have investments worth about $300,000, plus our home.
And not once have those investments phoned me at 10 pm and asked me to come and unblock a toilet.
And no rental property has kept us both at work so we could top up the mortgage payments.
Instead, our investments have diligently grown and produced dividend income that we just keep on reinvesting. All of those companies we have invested in are using my money to grow their businesses, support a workforce and support our economy and country. And that is where it feels better to invest my money.
Could we have created wealth far greater than this had we borrowed hundreds of thousands of dollars and purchased rental property? We will never know. But I’m just so grateful that we have gone about it the way we have because the last 12 years have been good ones for Jonny and I. And that’s despite the enormous upheaval and trauma of the Christchurch earthquakes which occupied at least four years of our lives. The stress we endured during that time was never over money and to me that is priceless. So much stress for Kiwi’s is around money and it’s damaging our mental health and our marriages more than we would like to admit.
If you are looking to grow your wealth in my view it’s about having money in the right places at the right time in life and although our investments may seem small to many, they grow year on year beyond the amounts we invest..
And by not using debt to (supposedly) generate wealth we have been able to remove a lot of stress and anxiety that money can cause and we get to enjoy life now, not just when we turn 65.
We have to be careful with our money (we all do though), we always live on less than we make, we always invest first, we always pay cash and we always budget and save for the things that are meaningful to us. Most importantly, we don’t feel like we are missing out on anything.
The way we live and invest has allowed us to:
Drop our daughter at school and collect her every single day
At least one of us has been able to help out at school whenever we are asked and volunteer in our community when we are called upon
When the health of my parents deteriorated, I stopped my part-time work completely for one and a half years to help them
We’ve travelled to America, Canada, Europe, Vietnam, Thailand, Singapore, Australia, Cook Islands and China
I’ve been able to spend hours every single day, for no financial gain, writing this very blog and volunteering my time to answer all the emails I get and go out and have coffee with other people who are interested in talking about personal finance
Jonny’s been able to go running all morning and start work after lunch. Or not at all. For the last eight years, we have both only worked part-time (or not at all)
I genuinely love my part-time job and look forward to going to work 17 hours each week
We have never resorted to debt to supplement our lifestyle
I asked Jonny what the advantages have been of taking this path instead of investing in rental properties and he said that it gives us more freedom of choice. Working part-time is enough and it frees you up to do whatever else it is that you like to do.
To finally end what has turned into a pretty long blog post…
You know what, it’s every bit as good as you would imagine.
I think we put too much store in housing in New Zealand; you know it’s not a requirement by law to acquire as much property as possible right? We are asking a simple house to represent and achieve so much for us and I think that we are misguided and have our priorities out of whack. We seem to pin all of our success on owning not one but many properties and gloating about the capital gains, whilst ignoring the out of pocket expenses and the impact on our own lifestyle to keep all the balls in the air. We seem to have forgotten that the purpose of a house is to be a HOME, to provide protection and shelter. Personally I think that if we were all a little broader in our thinking and realised that there are other ways to provide an income and there was a lot less greed then we would stop feeding the ‘housing crisis’ and that those who want to own a home for their family could afford one without having to put so much at stake.
Personally I’m annoyed at our own house value. It’s too much equity tied up in an illiquid asset and it’s also expensive to run (rates, insurance, maintenance etc) so month by month I’m working to “rebalance my portfolio”, which is just a fancy way of saying I’m trying to redress what I see is an imbalance where I have too much money in housing and not enough in other income-producing assets. Our current financial situation is one that has taken time and we have never been in it for fast cash and we have worked out that slow and steady does indeed win the race.
Last week when I was over in Oamaru I went on a walk with my dog Blue and as I went past a little well kept hobby farm, I thought to myself what a nice spot the owners had. A man was outside working and I called out to him and said how much I admired his property and that it must be a nice spot to live. He said he had moved there 14 years ago from Auckland and he said: “you know what, it’s every bit as good as you would imagine.” I thought that was a timely conversation given the number of people from Auckland who get in touch with me who are feeling overwhelmed by mortgage stress or by their rental situation. There are other places to live and be happy throughout New Zealand.
I really liked his comment and it’s stayed with me. Jonny and I have done things a bit differently but you know what, it’s every bit as good as you would imagine.
